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September 30, 2009

Four Things You Didn't Know about Unemployment

There is a lot of commentary about the unemployment rate. Various pundits are determined to find the worst possible interpretation of data, and also to impugn any official reports. Let us take a closer look. Many of the answers come from the following source, helpfully highlighted by Barry Ritholtz at The Big Picture:

Anyone who took a few minutes to read this important article would have some real insight into the world of policy nerds -- people like us!

Since few will be willing to invest the time to do a little real homework, here are the key things you would learn.

#1. Presidents do not dictate changes in statistical procedures.

This flies in the face of the popular "rogue economist" selling his conspiracy theory. It will also seem implausible to the "B" movies fans. Nevertheless, it is the boring truth. The Clinton-era changes in employment measures were the result of a long process, thoroughly examined and challenged by many groups. The final measures adopted the recommendations of the 1979 Levitan Commission, chaired by the renowned labor economist, Sar A. Levitan. Here is a glimpse of the process, taken from the Norwood and Tanur Article:

The ProcessThe leadership of the two agencies [Census and BLS, jm] began a joint effort to develop a comprehensive strategic plan to reaffirm the CPS's leadership in laborforce surveys by using state-of-the-art questionnaire design and advanced technology. A series of meetings with the senior staff of the two agencies, including the BLS commissioner and the Census director, delineated the comprehensive set of tasks that needed to be carried out. Several joint task forces were established to develop the research issues that needed to be addressed and to establish the necessary plans, budget estimates, and time tables for implementation. The work began with efforts to identify areas of the old questionnaire that might need change. First, experts from BLS and the Census, as members of the CPS Questionnaire Redesign Task Force, reviewed problem areas. Based on their experience in developing and analyzing the data, they were often able to see questions that had a high potential for response error or that failed to implement existing definitions properly. They also noted questions needing definitional changes and identified areas of labor force analysis for which more data were needed. They believed that because of the dramatic increase in labor force participation of women and the rise in part-time and temporary workers,more information was needed from the survey about these categories of workers. Bureau of Labor Statistics staff were also eager to develop a more user-friendly processing system so that these and other important analytical issues could be addressed more easily and more quickly than in the past.

Next, the task force recommended a program of preliminary research.Respondents were brought together in focus groups to explore their understanding of the concepts underlying the questions asked. It was this technique, for example, that confirmed a discrepancy between the respondents' and the CPS's use of the term "on layoff." Another preliminary technique tapped interviewers' experience with other CPS concepts by using card sorts to explore their coding of open-ended questions about job search and other matters (Fracasso 1989).

The next step was to design two new questionnaire....

This goes on for pages. Any objective reader of this report will immediately dismiss the conspiracy theory. There is no way that all of these academics, bureaucrats, and observers would have maintained some conspiracy. They have different ideology and policy preferences. What they shared was a desire to "get it right."

#2 The changes made the employment measures worse. Here is a key quotation:

In November 1993, government information suggested that the jobless rate, undoubtedly one of the most politically sensitive of all federal statistics, had been substantially underestimated-by about half a percentage point-for many years. And this, in spite of the fact that the Current Population Survey (CPS), the 53-year-old survey that produces the data to assess the unemployment rate and provides a great deal of other labor force information, has long been used as a model of the best in survey design both in this country and around the world. What had changed?

The biggest factor was the increase of women in the labor force. The BLS statisticians, like all data lovers, want to see continuous series, unchanged by methodology. When the world changes, sometimes the questions must follow. The BLS altered the workforce definition in a way that instantly increased the most common unemployment measure --- because it was the right thing to do.

Part of the change was a clarification of what it meant to be part of the work force. This list of questions determines what respondents were really doing -- looking for work, attending school, keeping house or going fishing. The current measures of labor force participation resulted from this work. In prior years, we have no idea of what the answers might have been.

#3 The Federal Government measured the impact of the changes.

The BLS and the Census Bureau did an "overlap" sample where both the old and new questions were asked of 12,000 respondents. By comparing these answers, one can infer the impact of the changes.

It is pretty obvious that this thoughtful statistical technique is the work of scientists, trying to find the right answers. Those who are making accusations about political motives need to explain why this extra care was taken.

#4 Current unemployment, while very bad, does not approach that of the Great Depression.

Here at "A Dash" we have a mission of helping investors to find the best information from the best sources. Often this means a focus on the change in economic conditions. Some sources seem determined to find the absolute worst interpretation of every economic report. This is currently a great way to get popularity on the Internet. Some others seem to have a bullish spin on everything, perhaps going for a niche market.

Our idea is a bit different. We try to find the best indicators from believable sources. We classify these indicators as leading or coincident. We then stick with the program, unlike others who discard or change measures in a heartbeat when they no longer like the results.

The Great Depression comparisons are erroneous. They also seem quite unhelpful in recognizing key economic trends. Here is a source for thoughtful readers:

In fact, there are no continuous unemployment sources showing that current results are comparable to the Great Depression. Anyone suggesting otherwise is blowing smoke.

And that is the official answer to our Summer Quiz Question #6. This is the last of the answers, and we will declare a winner this weekend, awarding a nice prize from Amazon.com. In practice, anyone who did the homework and got most of these answers right enjoyed the summer rally, and ignored the "sell in September" rhetoric."

Comments

Did you get a look at this?

In accordance with usual practice, the U.S. Bureau of Labor Statistics is announcing its preliminary estimates of the upcoming annual benchmark revision to the establishment survey employment series. The final benchmark revision will be issued on February 5, 2010, with the publication of the January 2010 Employment Situation news release.

Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for the month of March. These counts are derived from state unemployment insurance tax records that nearly all employers are required to file. For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2009 total nonfarm employment of 824,000 (0.6 percent).